Uchi is a small restaurant chain specializing in Japanese dishes. Its equity has a market value of $6 million and its debt has a value of $4 million. Its equity beta is 1.5. Investors expect an 8% return on the market portfolio and a 1% risk-free return on Treasury securities per year. The yield-to-maturity of Uchi’s debt is 6% per year and companies with similar credit ratings as Uchi have an annual default probability of 2%. You expect that the debt holders will not receive any payments in the case that Uchi defaults. Uchi’s marginal corporate tax rate is 20%. What is the Weighted Average Cost of Capital (WACC) of Uchi?

Answer rating: 100% (QA)

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